Automatic enrollment, the defined contribution plan designfeature considered essential for closing retirement savings shortfalls, has vastlyaccelerated participation in workplace retirement savings plans, aswas expected when the Pension Protection Act was passed in2006.

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While the increase in plan participation bolsters the case forauto-enrollment’s utility, research recently presented to theAmerican Economic Association calls into question the tollautomatic enrollment is taking on the debt load of middle-classsavers.

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A study of civilian U.S. Army employees in the Thrift SavingsPlan shows that participants automatically enrolled in the planafter the feature was implemented in 2010 are carrying higherautomobile and mortgage debt.

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That begs an important question as more employers are encouragedto auto-enroll employees, and proposed and enacted policies at thestate and federal level seek to use automatic enrollment to nudgehigher savings rates: Are automatic savings featuresunintentionally increasing American’s debt burden?

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Auto-enrollment’s impact on plan participation has beenmonumental. Consider the most recent numbers from large plansadministered by Vanguard. According to the firm’s 2017 How AmericaSaves study, adoption of auto-enrollment has increased 300 percentsince passage of the PPA, which provided fiduciary relief and taxincentives for implementing the feature.

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In 2012, 32 percent of Vanguard plans had adopted automaticenrollment. By 2016, 45 percent had.

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That led to an explosion in the number of participants Vanguardserves. In 2012, the firm papered DC accounts for 3.4 millionparticipants. By 2016, it counted 4.4 million participants asclients. Auto enrollment explains the 30 percent increase, as thetotal number of plans Vanguard administered actually decreased inthat time.

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In Borrowing to Save? The Impact of AutomaticEnrollment on Debt, retirement economists studied theimpact of automatic enrollment on Army employees, and found it“significantly” increased car and home loans by 2 percent of incomeand 7.4 percent of income, respectively.

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As non-collateralized debt increased, total retirementcontributions were only modestly higher after auto-enrollment —5.8percent when considering employee and employer contributions.

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In 2010, new employees were auto-enrolled in the TSP at adefault deferral rate of 3 percent, with a 100 percent match fromthe Army; the next 2 percent of employee deferrals were matched at50 percent.

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The study shows that the 3 percent automatically deferred to thesavings plan was offset by the higher car debt.

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The higher home debt further offsets the increased contributionsfrom automatic savings. The economists say automatically enrolledparticipants are able to obtain larger mortgages by leveraginghigher retirement account values.

Auto-enrollment worth more debt?

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The good news from the paper is that automatic enrollment is notforcing participants into higher credit card debt. And the papernotes that the higher mortgage debt represents the acquisition ofreal estate assets that in time will likely increase in value, inturn increasing savers’ net worth.

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But the study raises an important question that retirementpolicy stakeholders will have to weigh: Do automatic savingsrequirements restrict workers’ cash flow and in turn require otherexpenses to the financed by higher debt?

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While auto-enrollment has succeeded in increasing participationrates, the knock on the design is that it has deflated overallsavings rates.

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The principle of inertia that supports automaticenrollment—participants will most likely not opt-out of savingsplans once enrolled—has been a double-edged sword.

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Thanks to inertia, participants are mostly not opting out afterenrolled. But neither are they opting to increase savings rates.Vanguard data shows that average deferral rates have decreased asparticipation rates have gone up.

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“The decline in average deferral rates is attributable toincreased adoption of automatic enrollment,” write Vanguardeconomists. “While automatic enrollment increases participationrates, it also leads to lower contribution rates when defaultdeferral rates are set at low levels, such as 3 percent orlower.”

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To counter that, plan providers and policy specialists havepromoted automatic escalation in accord with auto-enrollment.

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Legislation at the federal level proposed by Rep. Richard Neal,D-MA, would require employers to offer 401(k) plans, and set anautomatic deferral rate of 6 percent, with an annual 1 percentincrease in savings.

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And the Oregon Saves auto-IRA program, which will require allemployers that don’t offer a 401(k) plan to enroll workers by 2020,sets an automatic deferral rate of 5 percent, with an automaticannual increase of 1 percent.

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In both of those plans, participants can opt out of saving, orreduce their deferral rate, much as participants in theprivate-sector 401(k) plans can.

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But as the new research points out, nuanced questions remain asto the practicality of aggressive automatic features.

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How much can median earners really be expected to save forretirement? If federal and state policies aim to increaseretirement deferrals, how much increased personal debt isacceptable in turn?

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And perhaps most pressing: Are lawmakers and industry expertsadequately balancing those questions?

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.